Long replacement cycle drags down iPad sales

Apple on Tuesday announced it sold 13.3 million iPads in the second quarter, a year-over-year drop of 9%, the second straight quarter of declining numbers, and blamed a slowdown in developed markets.

"iPad sales met our expectations but we realized they didn't meet many of yours," said CEO Tim Cook in a statement he read at the beginning of the quarter's earnings call with Wall Street. "Our sales were gated in part by a reduction in channel inventory and in part by market softness in certain parts of the world (emphasis added)."

Analysts had expected a down quarter, coming up with an iPad sales average of 14.4 million, which would have represented a more modest 1.3% downturn.

It was the first time that Apple acknowledged that declines in iPad sales had been caused, if only in part, by a soft market. In both earlier instances when iPad sales dropped, Cook blamed Apple-directed inventory changes or the timing of new model launches, or both.

The drop in iPad sales wasn't out of the blue: In May, IDC lowered its forecast for tablet shipments for 2014, saying then that the year would see growth of 12% -- down from a March prediction of 19% -- and dramatically off 2013's explosive 52% gains.

Even so, the slide triggered plenty of headlines. "Is the Curtain Falling on Tablets?" asked the Wall Street Journal (subscription required). "Apple's iPad Problem" said Slate.

Some analysts, however, decried what they called "handwringing" over Apple's tablet fortunes, countering that the news, while bad for the Cupertino, Calif., company, was not disastrous.

"No, I don't think they are in tablet trouble," said Jan Dawson, chief analyst at Jackdaw Research, in a Wednesday interview. "The user base is growing, the business is still enormous -- it would be a Fortune 100 company all on its own -- and it's very profitable."

In an analysis published on his blog Tuesday, Dawson was more explicit. "I believe the much-discussed death of tablets has been greatly exaggerated," Dawson wrote, echoing others' comments over the last two years about the decline in personal computer sales.

Van Baker of Gartner was noncommittal when asked the same question. "I don't know if it's in tablet trouble," Baker said. "But what's clear is that the refresh cycle for tablets is dramatically different than most people thought it would be."

Baker's point on tablet refresh was a thread that ran through most experts' commentary on the slide in iPad sales. For many, the mounting evidence that tablets in general, but Apple's iPad specifically, were being held by buyers longer than anticipated was one of the primary reasons, if not the reason, why iPad growth has stalled.

Ben Thompson, an independent analyst who covers technology on his Stratechery website, put it plainly. "Clearly the iPad has hit a wall, and I suspect the issue is the replacement cycle," Thompson wrote (subscription required). "iPad growth has been driven by new customers, but as Apple has saturated the (smaller) market of people who want a third device, there has not been a wave of upgraders to pick up the slack."

Early assumptions that most tablet owners would replace their devices every two years -- misguided as it turned out, because tablets are not smartphones, which do turn over every two years on average -- proved wrong.

"The replacement cycle for tablets is definitely longer than for smartphones, because most tablets are not on a carrier contract," said Carolina Milanesi, chief of research at Kantar Worldpanel ComTech, referring to the smartphone subsidies prevalent in the U.S. that reduce consumers' out-of-pocket expenses when they pick up a new handset.

Dawson estimated that the typical iPad owner upgrades to a newer model closer to every three years than every two. Others, like Thompson, equated the iPad's problem to that of PCs, which have also had longer replacement cycles.

Other factors play a part in the longer iPad replacement cycle, said analysts interviewed by Computerworld, including robust design, an active ecosystem that provides apps which run even on older models, and Apple's lengthy iOS support policy. For example, iOS 8, which will launch in September, will run on every iPad Apple has produced except for the 2010 original, including 2011's iPad 2.

Another case some analysts have made is that tablets, unlike smartphones, are a luxury, even in developed markets like the U.S., and that because their owners spend less time on tablets than with their phones, they are less motivated to upgrade regularly.

Even the way Apple markets the iPad works against frequent upgrades, said Benedict Evans of venture capital firm Andreessen Horowitz. "The iPad paradox: by making specs irrelevant, and selling to people who don't want to have to care, it makes it harder to sell upgrades," Evans tweeted Tuesday.

In other words, as Apple boosts the hardware specifications for new iPads -- this fall's model will probably have an Apple-designed A8 system-on-a-chip (SoC), a presumed step up in performance from last year's A7 -- iPad buyers simply won't care. Unlike PC buyers of, say, a decade ago, they're not driven by increases in processor performance to buy the newest shiny.

"The days of spec marketing are over," said Baker, referring not just to tablets, but also to personal computers. "Let's face it, I have an employee with an [original] iPad and she's perfectly happy with it. So the changes from one iPad to the next are not hugely compelling to people."

But the longer-than-expected refresh cycle may have a silver lining for Apple, Dawson said. Because of the iPad's fast initial growth -- much faster, for instance, than for the iPhone, that speed driven by an already-in-place App Store and the smartphone's large installed base -- there are large numbers of iPad owners using a tablet that's more than a year old.

Dawson was convinced that the tablet age bulge represented a large upgrade opportunity for Apple in the next 12 months. "If upgrades continue at a similar rate to what we've seen so far, this bulge in the base should cause a similar bulge in sales over the next year or so, perhaps starting as soon as late Q3," Dawson wrote on his blog.

And there are untapped markets for the iPad, analysts asserted, notably to businesses that buy tablets for their workers, and don't simply adapt tablets owned by employees who bring their devices to work.

Not surprisingly, Apple's CEO spent quite some time on the earnings call talking about the recently announced partnership with IBM, and Apple's opportunity to sell more tablets to businesses as a result.

"[Al]though our market share in the U.S., in the commercial sector, is good at 76%, the penetration in business is low. It's only 20%," said Cook. "And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business."

"That's why they're focused on the enterprise, that's why it's right they're focused there," said Baker of Gartner. "Cook would love to see that 20% climb to 60%. So the IBM deal was a very smart move on their part."

Cook said he was excited about the enterprise market for the iPad. "And we win if we can drive that penetration number I spoke about from 20% to 60%," Cook said during the Q&A portion of the earnings call. "That would be incredibly exciting here. The walls would shake. And so that's what I hope for."

This article, Long replacement cycle drags down iPad sales, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

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